Charging into our list

For anyone watching the new Apple TV+ drama WeCrashed about Adam Neumann’s meteoric rise and implosion as the boss of WeWork, the unicorn will be a familiar image. That’s because in the opening credits the mythical horned beast features in every shot, as a reminder that the shared office firm was once regarded as one of the biggest unicorn companies of them all.

Lest we forget, the term unicorn was coined in 2013 when US investor Aileen Lee used it to introduce 39 unlisted firms that were worth $1 billion or more.

We began work on our own ranking of Chinese unicorns in late 2020 and introduced it early last year.

What’s new about the latest ranking?

Our snapshot of China’s Top 50 Unicorns – which is based on reports in the media and information from data aggregators including 36Kr, CB Insights and Hurun – is topped once again by Bytedance with a $400 billion valuation (see full table below).

It’s been just over a year since our debut Top 50 Unicorns ranking (see WiC530). The firms at the head of the ranking have been treading water, however, especially in the internet and tech sector, which has seeded many of the biggest unicorns in the past.

WiC has written extensively about the impact of nearly 18 months of tougher scrutiny from government regulators, triggered by the collapse of fintech giant Ant Group’s IPO in November 2020. Six months later ride-hailing platform Didi Global had a near-death experience of its own, when it was punished for pushing ahead with a New York listing in apparent contravention of Beijing’s instructions.

By then Ant’s valuation was already dropping steeply from its highs towards a much lower level of $200 billion. There has been little sign of it regaining the lost ground or getting back to a debut in the public markets. Didi’s market cap also took a hit this week after it said it won’t pursue a relisting elsewhere until its US delisting is completed.

Back at the summit of the Top 50, only SheIn has shown a significant increase in value after completing a fundraising in April that was reported to have more than doubled its valuation to $100 billion.

That means the fast-growing fashion retailer, which makes almost all of its sales to consumers outside China, has closed some of the gap on Ant and Bytedance immediately above it in the ranking, as well as now being worth more than rival retailers Zara and H&M combined.

How has China’s unicorn herd taken shape over the last two years?

Our inaugural ranking of China’s unicorns reflected the rise of the biggest of the internet and tech platforms, which had bulked up across a range of services in consumer-facing applications in areas like e-commerce, social media and digital payments.

Much of the investment in the unicorns was coming from heavyweights Alibaba and Tencent, the two biggest names in the sector, who were taking stakes in the best of the newcomers, alongside leading venture capital firms like Hillhouse and Sequoia China.

There was a sudden rise in the valuations of many of these ‘platform’ companies as the pandemic took hold, with a surge in demand for online services from locked-down households, especially in sectors like edtech. But the mood turned nastily against firms in areas like fintech, social media and gaming, e-commerce and delivery as the government started to take action against the trends that it disliked, such as the sudden rise in readily available loans for consumers or the spread of online games often seen as addictive to young people.

The most dramatic changes in government policy saw the evisceration of the edtech platforms, however, which had soared in value as Covid-19 forced millions of children to study from home. By the summer of 2021 they were being blamed for stoking parental and student anxiety about the educational ‘arms race’ and Beijing blew the sector up by banning the edtechs from making profits. All of them dropped out of the Top 50 ranking as a result when we did our third quarter update last year.

What’s driving the rise of a new group of unicorns this year?

The Top 50 has also highlighted sectors where China’s unicorns were showing more success, especially in artificial intelligence, where a small group of companies was better aligned with government priorities to boost domestic capabilities in semiconductors, machine learning and smart manufacturing.

SenseTime – the largest of China’s AI firms – dropped out of the ranking after completing a $16.4 billion IPO in Hong Kong in December. But this month’s compilation tells the story of two other sectors that have started to feature – New Energy as well as Auto and Transportation – which have contributed eight new companies to the unicorn grouping.

There are two new entrants in ZEEKR (it was spun out of the carmaking heavyweight Geely only a year ago) and LeapMotor, both manufacturers of electric vehicles. CALB, SVOLT and WeLion make batteries for new energy vehicles too.

There is a debut for Tuhu.cn, a platform that links drivers with after-sales services and parts, as well as another new joiner in WeRide.ai, which offers full-stack software to guide robotaxis and robotrucks. And the final newcomer is T3 Chuxing, a ride-hailing platform backed by some of the country’s leading carmakers, which is seizing on Didi’s difficulties to grab market share (see WiC563).

Fuelling some of the rise of the new contenders from the auto and new energy sectors is talk of a tipping point for the EV industry, where sales of plug-in vehicles have started to climb impressively. Analysts are predicting a record quarter of more than a million EV sales, with almost all of the leading brands reporting significant gains in revenues. Out in front is BYD, the leading EV brand in China. It is also the first of the major Chinese car companies to break with the past in calling a complete halt on production of combustion engines. It now only makes electric and heavily electrified plug-in hybrid cars.

In this context, investors are looking more favourably at the prospects of battery producers CALB, WeLion and SVOLT, who all want to replicate the success of CATL, the Shanghai-listed battery maker that’s now the leading supplier to the world’s electric car firms. They are also betting that new EV manufacturers like ZEEKR are poised to challenge premium brands already in the market such as Tesla and NIO.

There’s excitement about the prospects in autonomous driving as well, where China is expected to be the first market to embrace the wider introduction of smart mobility services. That is apparent in the performance of two of the pre-existing unicorns in the Top 50 – Pony.ai, a provider of software systems for autonomous driving, and Horizon Robotics, which makes AI chips for smart mobility applications (see WiC566 for an interview with its founder Yu Kai) – which both reported increases in their valuations over the period.

The story is similar for newcomer WeRide.ai, a developer of the software that EV manufacturers are already integrating into their cars for so-called ‘conditioned automation’ in areas like highway manoeuvring and parking.

Pony.ai and WeRide.ai are setting the pace in self-driving software for the fleets of robotaxis and robotrucks that are likely to get the earliest approvals for the Level 4 and Level 5 licences in which human drivers will not need to be present at the wheel.

Ding Yuqian, head of A-share Auto Research at HSBC Qianhai Securities, says that companies that get ahead in this technology are going to prosper because they will have more data for the next generation of algorithms that will support the spread of autonomous driving to a wider range of deployments. Surveys of Chinese consumers suggest they are more open to the new technology than their counterparts in markets such as the US, while China has other crucial advantages in its advanced “connectivity”, Ding adds. “The country is ahead versus the rest of the world on information infrastructure like highway networks, 5G networks, data centres as well as base stations. This is all essential to supporting the transition towards higher levels of autonomous driving,” he posits.

Other parts of the unicorn world seem more subdued, however?

Despite the bright spots in the auto and new energy sectors, there’s still a sense that some of the other unicorns in China have lost a bit of momentum.  

Three years ago, the herd was widely applauded in the national media, with predictions that the number of privately-held enterprises boasting $1 billion valuations would soon exceed those in the United States. That story is no longer being celebrated in quite the same way. Perhaps that’s because there are now so many unicorns that they no longer command the same headlines. But there’s no doubt that the more stringent political scrutiny for the biggest of the unicorns, as well some of the former unicorns that sold shares in the public markets, has had an even bigger impact.

Beijing wants Chinese companies to build compelling and innovative businesses with international reach and global profits, although the government is also more cautious about the same firms wielding too much power in China – hence the efforts over the last 18 months to rein in the influence of the likes of Tencent, Alibaba, Meituan, Didi and others. 

Scaling at speed is often cited as a key factor in how unicorns prosper. But getting onto the high-speed trajectory is harder when paths start to diverge with the policymakers or when the companies concerned are seen as too disruptive in areas of the economy traditionally controlled or guided by the state.

Trends like these have forced investors to think differently about where they are risking their capital. “Venture capital firms in China, especially US dollar funds, didn’t used to care whether a start-up made money or not in the beginning. As long as the company was seeing miraculous growth, it could take care of monetisation later. But this formula has stopped working because any app can be taken down at any time,” one China-based entrepreneur told TechCrunch this month.

Investors must now think anew about how they plan to cash out of their shareholdings, especially if the intention is to sell unicorn stock on international exchanges. Many companies are already finding it harder to plot a path to an overseas listing, after the cybersecurity regulator said internet platforms holding data on more than a million customers from China must first submit to a security review.

Then there’s the prospect of a wider ban on share issuance for Chinese companies in the US, because of a row over American demands for fuller access to their audit reports.

The Chinese Securities Regulatory Commission has sounded more conciliatory about reaching an agreement with its US counterparts in recent weeks, but there is still no guarantee that the two governments will come to a final deal. Without one, the unicorns are going to be barred from American markets, closing another avenue for investors to exit.

Watch out for the ‘little giants’ too

Many of China’s unicorns will have the option of selling their shares in Shanghai, Shenzhen or Hong Kong, of course, provided they can get the green light from regulators. But in terms of their reputations as contributors to the national economy, they have lost some ground in recent months to another group of companies called the ‘little giants’, which have started to feature in the media on a more regular basis.

The ‘little giants’ typically are working in areas of hardware and technology that the government has identified as priorities. The China Daily describes them as small and medium-sized enterprises with solid market shares and innovative skills in core technologies, which are likely to become future champions in bottleneck sectors.

“These ‘little giant’ companies, which are able to fill certain weak niches in the country, will help improve the industry and supply chains and enable China to become a manufacturing powerhouse,” Li Chao, chief economist of Zheshang Securities, explained.

The government has talked about its ambitions for SMEs for years but it stepped up the ‘little giants programme’ about four years ago, following trade and technology tensions with the Trump administration. At least 4,762 of them have been identified by the Ministry of Industry and Information Technology since 2019, many in the semiconductor, machinery and pharmaceutical sectors.

They get help from the provincial authorities in the form of tax cuts, land grants and preferential loans, although a smaller group of elite candidates is offered direct funding by the central government. Designation as a little giant is also a signal that the companies are likely to be insulated from regulatory punishment, Bloomberg reports. “This is helpful to start-ups in many ways: It’s a subsidy. It’s a grant. It’s an honour. It’s a stamp of approval,” Lee Kai-Fu, one of China’s best-known venture capitalists, told the news agency.

At a time when some of the biggest venture-capital funded unicorns have run into trouble with the authorities, the little giants also seem like a better fit with the Common Prosperity theme favoured by President Xi Jinping. In this perspective they support the wider economy better than many of the spectacularly valued but loss-making unicorns, where the eventual financial returns are often concentrated across a few heavyweight shareholders and a small group of private equity firms.

That’s not to say that China’s unicorns are a dying breed. There are still great fortunes to be made by the strongest in the herd. But there has been a change of emphasis in which the internet tech behemoths are no longer being billed in quite the same way as the pride and joy of the Chinese economy. Instead they must share the limelight with the little giants and their role in transforming China’s future. 

To visit our dedicated Top 50 China Unicorns section of our website for profiles on all 50 firms, click here.

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